Will New Apartment Standards Get Builders Building?

If the route to fixing the housing crisis is all about adding supply, it’s not looking too good.

In the first 11 months of last year, building started on 720 units in Dublin, show figures from the Department of Environment. In the same period for the whole country, building started on 7,729 units.

Dublin city alone needs an estimated 8,000 units a year. So, in short, we’ve a long way to go.

That, Labour Minister Alan Kelly has said, is where the recent changes in apartment standards — which among other measures reduced minimum apartment sizes, the number of lifts, and the percentage of apartments that need windows facing two directions — come in.

It’s about making it possible for the construction sector to build again, Kelly toldMorning Ireland back in December.

“We have made changes to ensure that there can be apartments built, particularly in the city centre locations, that are actually affordable,” he said.

But have they?

Three Sets of Standards

For Dublin, two sets of non-mandatory apartment guidelines – planners had leeway to make exceptions – have been in play over the last few years. And now there’s a third set of mandatory standards.

1. The first non-mandatory set: the minimum guidelines set in 2007 by Department of Environment.

2. The second non-mandatory set: the minimum guidelines set by Dublin City Council in 2009, which upped the minimum floor areas, and other requirements.

3. And the third, mandatory set: the December 2015 apartment standards brought in by Kelly, which are based on the 2007 guidelines, but with some updates.

The third set is in place now, and they’re mandatory, not flexible.

Now we’ve had that detour, let’s get back to the business case for bringing in these apartment standards in December.

Where’s the Business Case?

The closest thing to a business case released by the Department of Environment is a document which compares two developments on the same site footprint, before and after the new standards.

One is for the second set (above), Dublin City Council’s higher standards. And the other is for the first set, the 2007 Department of Environment standards, which — as we just noted — are similar to what Alan Kelly reinstated in December 2015, including reduced minimum apartment sizes.

In the document, Department of Environment document, a nine-apartment complex built in line with Dublin City Council’s standards costs €2,338,875 and makes a loss of €178,875. Meanwhile, a ten-apartment complex built in line with the 2007 standards set by the Department of Environment, costs €2,224,600 and made a slight profit of €15,400.

There is a reduction in costs, then, for sure. But if that’s the business case, some housing experts say, it’s a poor one. The profit margin is just 0.7 percent.

“The money doesn’t work,” says Lorcan Sirr, a housing expert at Dublin Institute of Technology. “You’re not going to get developers to build for €1,540 per unit. That’s nonsense.”

“You can look at that and immediately say, this is completely unworkable,” said Sandycove-based architect Maoilíosa Reynolds. “There’s no developer in his right mind would do that, take on a development for two years for a margin of 0.7 percent.”

You’d make as much depositing the money for eight months, Reynolds said. “This suggests building at cost is a reasonable basis to justify a reduction in apartment standards. It’s not.”

But Department of Environment spokesperson John Whelan disagrees. He says the difference between a loss of €178,875 and a profit of €15,400 is considerable: “You’re looking at a saving using our [standards] rather than the Dublin City Council guidelines.”

Andrew Nugent, president of the Society of Chartered Surveyors Ireland (SCSI), said he hadn’t seen the department’s analysis, but that, in general, the changes were a “step in the right direction and will encourage more sites to make it more feasible to build, certainly”.

It’s Kind of Complicated

Can we believe the Department of Environment’s own analysis?

A few organisations have pulled together sums on the costs of construction under different standards and guidelines. Property Industry Ireland has its set. The Society of Chartered Surveyors of Ireland has its analysis.

The problem with giving a definitive answer as to how changes might affect the feasibility of building apartments is that each development is different. It’s not the case that if you reduce the minimum apartment size and then lop off a quarter of each apartment, it will cost 25 percent less to build.

On top of that, the Dublin City Council guidelines were not mandatory, so the council’s planning department could allow smaller apartments sometimes, and negotiate with developers on different fronts to make sure the city ended up with quality schemes.

Plus, it’s not just about whether it makes it cheaper; it’s also whether the changes that the Department of Environment went for were the most rational.

The most detailed independent analysis made public so far, that of architect Reynolds, concludes that the impact of the Alan Kelly’s reversion towards the Department of Environment’s 2007 standard isn’t that great, in terms of apartment cost, affordability, and supply.

For a start, as the Royal Institute of Architects of Ireland (RIAI) have pointed out, the sizes of the rooms set by the Department of Environment don’t fit into the minimum apartment sizes. So, effectively, the apartments have to be bigger than the minimum to meet the rules.

There are supposed to be cost savings that come from reducing the number of lifts, to one for every eight apartments. But those benefits may also be eroded, Reynolds says.

That’s because of recent rules that mean units can only be occupied after a whole building is done. Developers, therefore, have to carry the cost of lifts for longer before they start to make money, and that cost might amount to more than €6,000 per unit.

Also, the new standards mean that a minimum of 33 percent of units must be dual-aspect, in other words, they have to have windows facing two directions. (Under Dublin City Council’s old guidelines, it was 85 percent of units.)

But when you try to meet the requirements for both lift numbers and windows, you generally need one lift for every six apartments, rather than one for every eight. Not the reduction in the number of lifts that they thought.

Plus, if you go even deeper in the weeds — yes, even deeper — the new standards set a maximum apartment-to-lift ratio of eight, so more innovative housing designs which might save costs further are off the table.

Factoring All That In

Reynolds factored in all these issues, and others, and used figures from Property Industry Ireland to work out how the December 2015 apartment standards affect the cost of building apartments. He found that the cost of construction goes down in some areas of the country and up in others.

For a two-bedroom apartment, changes in the floor area, core arrangements, ceiling heights, and balconies lead to a cost reduction of €24,425 in Dublin City Council area, €9,764 in Dun Laoghaire-Rathdown, and €8,450 in Cork City Council. For Fingal and South Dublin — where there were smaller apartments and lower ceilings permitted before — they lead to an increase in costs of €2,165 and €6,964, respectively.

That means, Reynolds calculates, that the minimum total cost of a Dublin City Council two-bedroom apartment in 2016 is €331,055. That’s a long way from affordable.

“It’s fantasy land to think that this policy is going to deliver [two-bedroom] units that are less than €330,000,” said Reynolds. “They’re not going to be less than €330,000. A new 2015 minimum standard bedsit unit of 40 sqm will cost €280,000. Right now, you can pick up a one-bedroom apartment in Smithfield for as little as €160,000.”

In other words, there’s still a gap between the cost of construction and the market cost of apartments in many areas.

This analysis suggests that, while they reduced costs a bit, the December 2015 changes aren’t enough to make new builds a viable business proposition for developers in most cases.

Not everybody agrees. It’s feasible to build in many parts of Dublin now, says Nugent of SCSI.

In Dublin and elsewhere, for a while, you could buy apartments and homes for half the cost of building them, said Nugent. “Not so much in Dublin, now, in certain parts of it maybe.”

One Tool in the Toolkit?

Sure, the changes that Kelly made, including reducing the minimum size of apartments, reduces costs, Reynolds says. “The problem is that it’s the least effective way of reducing cost is attacking size, and it has the most effect of quality.”

He calculates that the reduction of 5 sqm in floor area for a two-bedroom apartment saves €5,4oo excluding VAT. There are other areas that the Department of Environment and Minister Alan Kelly could have looked at instead.

One option that Reynolds, and others, have been pressing for is for the government to take another look at the building control regulations (BCAR), which are not effective and add as much as €27,000 to the cost, said Reynolds. “It’s a huge cost.”

If they replaced the current system with one of independent or local-authority inspectors, the build price would be down from €331,000, to €304,000. “You could build in some areas now, if there was no BCAR,” he said.

Changes to the so-called “Part V” procedures, whereby developers have to set aside a certain percentage of homes for social housing, have also slowed down housing schemes. The SCSI estimated the cost of Part V per unit is approximately €10,000.

In the past, developers only had to open a conversation with the council on how they were going to meet their Part V obligations before they could file a planning application and get things moving. Now, they need a legal agreement on this with the council before they can even file.

The Construction Industry Federation (CIF) and SCSI have also suggested this as an effective way to lessen costs.

The Department of Environment says it is not depending on only one tool in their toolkit.

Changed apartment standards are “only one element in a number of elements,” said Department of Environment spokesperson John Whelan, pointing in particular to the vacant site levy which is due to come into force in 2019.

Others say it’s a constant process of monitoring the impact of different guidelines and rules on the cost and viability of construction.

Other measures “can still be done,” says Peter Stafford of Property Industry Ireland. “There was never going to be a single issue preventing apartments from being built, because if there was, it was be very easy to identify and resolve it. I think it’s a culmunation of issues.”

“For each project, which doesn’t happen, the chances are it didn’t happen for a combination of those reasons,” Stafford said. “It wouldn’t be one, single thing, which is stopping it. So the challenge is to see, do the new standards, will that resolve some issues? But I think it would be very naive to believe that solving this one issue on its own would suddenly provide the amount of apartments we need.”

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Reader responses

Pat Barry

at 18 September 2017 at 19:57

However this discussion of the added costs of BCAR is a bit of a red herring. The real added costs of building apartments are the site costs plus requirements for underground parking. These together add up to an average of 120,000 per apartment. Average site costs in Dublin are now 100k per unit which has tripled or quadrupled since 2012. If there is no profit in building, why are land prices tripling. Surely it would not make sense to buy land at prices which are not viable to make a profit. Yet they do – Why?

Speaking with a QS today about the difference between how Irish developers value development land when bidding, versus the UK, the Irish developers add in the hope value of the land in projecting what the future sales prices of the residential units will be, versus the current value of units. London developers value land based on the current value of the units. This is precisely what happened at the end of the last Irish boom, too much was paid for land to be possible to make a profit, unless the value of the units rose. If the value of the units does not rise, it is impossible to build until they do, or if they do, then bankruptcy -NAMA.

If you want to get into development in Ireland you need to acquire land. To do this at the moment you have to be desperate enough to bid way over what could be considered sensible. You either pull out at a sensible level or go all in and just hope that residential prices rise in the future. The current system only favours those who have no interest in developing ie are just speculating, the desperate or those who are willing to cut costs on standards.

Therefore continued calls for reduction of standards, reductions in VAT, etc, will do absolutely nothing except increase the cost of land,. The lower cost of building will simply be added on to what the bidder can bid on the land.

Unless Government tackles this with punitive land hoarding taxes which make zoned undeveloped land a liability nothing much will happen except continued rise is land prices and not much development. Land needs to be made available to those who want to build to high standards for a reasonable profit. These should not just apply to large land banks but to every available site no matter how small.

The 2nd cost which is factored in is the cost of underground car parking. This should no longer be required in any urban centre as within 10 years the combination of carsharing, driverless cars will make car parking obsolete. It adds 15- 20 k to the cost of each apartment.

I would also like to see detail on how BCAR adds 27k to each apartment. Does this mean that whoever is building a block of 100 apartments pays 2,700,000 for certification? This is not realistic. It is not building standards or BCAR which adds to cost it is mainly land prices.

Basically it is all about land prices and unless this is tackled we are going nowhere everything else is a red herring.

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